Basics of Stocks

You’ve probably heard about the terms “stock”, “stock market”, and “shareholder” but didn’t have a clear idea of what they are or how they work. I am going to cover the basics of stocks and how the stock market works. The term “stock” refers to a share in a company’s ownership; this means that you own a piece of the company.

Owning stock in a company makes you part of a group of people that, just like you, are also part owners of the company by owning stock and are called shareholders. Companies give the opportunity to people like you and me, to buy a piece of the company with the purpose of raising money for their company in exchange for a piece (a very small piece, but a piece nevertheless) of the company.

The stock is given a 3 letter name (i.e. XYZ or ABC) that will serve as their identifier to shareholders and traders everywhere. If a company issues 1000 shares of their stock and you have 10 shares then you own 1% of the company. These shares give you the possibility of having part of the profits of the company so if the company is profitable you will take part of the profits.

Due to technological advances, pretty much anybody nowadays can become a shareholder by buying shares of a company’s stock through the internet but owning stock in the company doesn’t mean you will be making the day to day decisions of the company. Companies have what they call Shareholder Meetings and in these meetings you can have the opportunity of voting for the Board of Directors, they will make the decisions in the company. You have the right to one vote per share owned so if you have 100 shares of a company you have the right to vote 100 times.

There are different kinds of stocks that companies offer. Let’s take a look at some of these stocks:

Common Stocks: This is the kind of stock that companies issue to the majority of shareholders. It gives shareholders one vote per share you own, but common stocks carry risk as if the company goes bankrupt the shareholder will lose his or her money.

Preferred Stock: This gives shareholder fixed dividends for life while dividends in common stocks vary throughout the lifetime of the share and are not guaranteed. The company has the right to buy the preferred stock from the shareholder at any time. Voting rights are different than in common stocks depending on the company.

It is important to mention that there is a kind of stock that gives companies the opportunity to control voting rights to a group of people. This type of stock will have either a “.a” or “.b” next to the company’s symbol for example one stock issue will be “XYZ.a” and the other “XYZ.b”. This gives a select group, 10 votes per share in one class and 1 vote per share in the other.

Stock Market

The stock market is comprised of exchanges where shares of stock get exchanged, also called traded, between buyers and sellers. The major exchanges in the U.S. are:

New York Stock Exchange (NYSE)

NASDAQ

American Exchange (AMEX)

Stocks get traded all over the world at different exchanges, but buying stocks at different places carry different requirements. Ensure that you study the requirements and risks before you make any investment decision. Investing in the stock market carries significant risk and educating yourself about the stock market is essential to be successful. Before you make an investment decision study the company and the market conditions